Investing in the stock market has made millions richer than ever imagined. Unfortunately, it's also caused some to lose a lot of money. The difference between those two extremes is avoiding common investing mistakes that too many people make.
In this article, we'll examine the top 7 investing mistakes and how to avoid them. If this sounds complicated, don't worry.
Avoiding these mistakes is quite simple.
The Top 7 Investing Mistakes (And How To Avoid Them)
Mistake #1. No Investing Goals
A common mistake is jumping into investing without a clear plan. Imagine starting a road trip without a map – you might be lost! Investing for the sake of investing is ripe for failure because you're more likely to stop investing (or “steal” from them) if you want money for something else, like a vacation or a big house.
How to avoid this mistake: Set clear goals for your investments. Are you aiming for long-term growth or short-term gains? Do you want to retire early or just have enough wealth in your 60s to never worry about money again? Maybe you want to put your kids through college?
Whatever it is, having a plan helps you stay on track.
Mistake #2. Not Being Diversified
Diversification is a fancy word for not putting all your money in one company (or even a sector). Imagine you're at a potluck and you only eat one dish – if it's bad, you're out of luck! Similarly, invest in different types of assets like stocks, bonds, and real estate.
How to avoid this mistake: Diversifying your investments is like having a well-balanced meal instead of just one type of food.
To do it, spread your money across different investment options, like stocks, bonds, and real estate. Each investment type behaves differently – when one goes up, another might go down, and vice versa. This helps reduce the risk of losing a lot if one investment doesn't do well.
Remember, it's like not putting all your eggs in one basket. By diversifying, you're giving your investments a better chance to grow over time while lowering the ups and downs that can come with the market.
Mistake #3. Following The Herd
Picture a bunch of sheep following each other – not a great idea when investing! Why? Consider this: if the herd were always right, everyone would be rich, wouldn't they?
How to avoid this mistake: Don't just follow the crowd. Just because everyone's buying a certain stock doesn't mean it's a good idea. Do your own research and invest in things you understand. If you need help, use a seasoned financial advisor to help steer you in the right direction.
Mistake #4. Timing The Market
Trying to guess when to buy and sell stocks is like predicting the weather – it's almost possible. In fact, the numbers clearly show that investors who time the market underperform those who leave their money invested. Even experts often get it wrong.
How to avoid this mistake: Instead of timing the market, focus on time in the market. Invest consistently over time to take advantage of the power of compounding. Use the dollar-cost averaging technique to avoid timing the market, and make sure to automate as much of your investments as possible.
Mistake #5. Ignoring Fees
Fees are like annoying little bites that can eat away at your returns. Investment fees might seem small, but they can add up over time and take a bite out of your returns. Imagine paying a little extra every time you buy a cup of coffee – it doesn't feel like much at once, but over months or years, it becomes a significant amount.
The same goes for investment fees.
Even seemingly small percentages can eat into the growth of your investments over the long run. That's why it's important to choose investment options with low fees, so you can keep more of your money working for you and build toward your richer retirement.
How to avoid this mistake: Keep an eye on fees, especially with mutual funds. Choose low-cost options (like index funds and ETFs) to keep more of your money working for you.
Mistake #6. Emotional Investing
Investing can be like a roller coaster – full of ups and downs. But making decisions based on fear or excitement can lead to trouble. The market punishes those who invest based on their emotions rather than their head.
How to avoid this mistake: Stay cool, especially when markets are volatile. Stick to your plan and don't let emotions drive your choices.
Mistake #7. Short-Term Thinking
Imagine planting a seed and expecting a tree the next day – unrealistic, right? Investing is similar. It takes time for your investments to grow. Nobody gets rich overnight in the stock market unless they are exceedingly lucky (think 0.000001% chance of that happening), or have access to sensitive information that nobody else has.
How to avoid this mistake: Avoid the urge to make hasty decisions based on short-term market fluctuations. Think long-term and be patient.
In conclusion, crafting a clear plan, diversifying your investments, and avoiding emotional decisions will set the stage for success.
Remember, the power of time in the market and the impact of compounding can work wonders for your wealth. Keep your eye on fees and choose low-cost investment options to ensure more of your money is working for you. Embrace a long-term perspective and stay patient – just like a well-tended garden, your investments will grow and flourish over time.
Happy investing (and avoiding those investing mistakes)!
Steve Adcock is an early retiree who writes about mental toughness, financial independence and how to get the most out of your life and career. As a regular contributor to The Ladders, CBS MarketWatch and CNBC, Adcock maintains a rare and exclusive voice as a career expert, consistently offering actionable counseling to thousands of readers who want to level-up their lives, careers, and freedom. Adcock's main areas of coverage include money, personal finance, lifestyle, and digital nomad advice. Steve lives in a 100% off-grid solar home in the middle of the Arizona desert and writes on his own website at SteveAdcock.us.